What does 'fair value' look like in practice? Three years into the Consumer Duty, here’s what we’ve learned.

Fair value is a simple yet important principle at the heart of the Consumer Duty[2]: the price customers pay should be reasonable, relative to the benefits they get. But applying that principle in practice requires judgement. 

Three years into the Consumer Duty, we’re seeing clear differences between firms that have embedded fair value into their approach and those that still need to strengthen their assessments, evidence and monitoring.

We recently reviewed[3] how firms across the consumer finance market assess, evidence and monitor fair value. We also carried out focused work on fees and charges across a range of credit products, and supervisory work on consumer hire and third-party ownership agreements for home energy infrastructure.

Many firms are getting it right, building fair value into how they design, price and monitor their products. Others are missing things that, in hindsight, could have been avoidable. Where firms fell short, a recurring issue was the evidence supporting their conclusions.

Here are 3 areas that separated the 2, and questions firms can use to challenge their approach to assessing and monitoring fair value.

Does your evidence actually tell you something, or just describe your product?

Across the firms and products we reviewed, stronger fair value assessments showed a clear, evidenced relationship between what customers paid and the benefits they could reasonably expect to receive. One credit card provider, for example, quantified the cashback, foreign exchange savings and other account benefits customers received, and set these directly against the fees and interest they paid. That gave them a clear evidence base for their fair value conclusion, not just a description of the product's features.

Weaker assessments tended to rely on assumptions rather than actual customer data. Some had relevant evidence, but it was scattered across different documents and never brought together into a coherent picture. This made it hard for anyone, including us, to see how firms had reached their conclusions.

Are you assessing fair value for different customer groups?

Fair value isn't one-size-fits-all. Firms showing an understanding of that nuance segmented their customers by factors such as credit risk, product usage, distribution channel and characteristics of vulnerability, and assessed fair value across the resulting groups. Some firms also assessed fair value across different pricing groups, including APR bands and risk-based pricing groups, to understand whether customers paying different prices continued to receive fair value.  

Other firms treated their whole target market as a single, homogeneous group when testing fair value. This made it difficult to spot if some customers were quietly paying more, or getting less, than others, which is exactly the kind of thing a fair value assessment is supposed to identify.

If customers can't picture the real cost, does the price even matter?

Fair value also needs to be considered alongside customer understanding. Even a well-designed, fairly priced product can fall short if customers don't understand what they're signing up to. Some firms tested comprehension directly, including one that proactively contacted customers incurring certain charges to check they understood how and when those charges applied. This gave the firm evidence about whether customers understood the charges, rather than relying only on the existence or readability of disclosures.

We also looked at consumer hire agreements for home energy equipment, where some promotions used 'pay as you save' claims that could lead customers to believe that savings or affordability were guaranteed. Those outcomes depended on factors such as equipment performance, changes in customers’ circumstances and future energy prices over agreements lasting up to 25 years. Firms should make these clear and avoid creating the impression that savings or affordability are assured.

What this means for your firm  

Use these findings to challenge your approach to assessing and monitoring fair value. Ask:

• Does your evidence tell you something meaningful about customer outcomes, or does it simply describe your product?
• Does your target market behave as one group once you look closely?
• Can customers understand the total price they might pay and the financial commitment they are entering into?

A common feature of stronger approaches was that firms supported their conclusions with evidence rather than relying on assumptions.

The good news is that this doesn’t need to always require complex modelling or new data. Smaller firms may be able to draw on information they already hold, including complaints, arrears, customer feedback and product usage.

If there's one thing to take from this, it's to show your working: what your evidence shows, how it supports your conclusion, what you'd do if it didn't.

We expect firms to read the full findings[3]. They also cover how firms assessed total price and benefits, used competitor benchmarking, and used controls to reduce the risk of foreseeable harm from fees and charges, including the home energy sector examples we touched on above. 

We'll keep monitoring this area through our supervisory work and will continue sharing what we learn as our understanding develops.